Tax Return Problem

Individuals Phil Smith and Kate jones formed P&K Corporation on March 1, 1996 to provide computer consulting services. The company has been an S corporation since its formation, and the stock ownership is divided as follows: 60% to Phil and 40% to Kate. The business code and employer identification numbers are 514519 and 24-3897625, respectively. The business office is located at 3010 East Apple Street, Atlanta, Georgia 30304. Phil and Kate live nearby at 1521 South Elm Street and 3315 East Apple Street, respectively. Their Social security numbers are 403-16-5110 for Phil and 518-72-9147 for Kate.

The Calendar year, cash basis corporations December 31, 2014 balance sheet and December 31, 2015 trial balance contain the following information.

Balance Sheet 12/31/2017 Trial Balance 12/31/2018 Debit Credit Debit Credit Cash. $ 12,000 14,000 150,000 $ 22.000 14.000 190.000 $ 38,000 94,000 10,000 34,000 5 63500 117.200 10.000 34.000 25,440 16,960 235,000 1,000 400 3,500 Investments (1).... Equipment (2,3) Accumulated depreciation.... Notes payable (3.4) .......... Capital stock .............. .. Accumulated adjustments account. .... Cash distributed to Phil Cash distributed to Kate .... Revenues... Dividend income (1) ........ Interest income (1) .......... Section 1245 gain (depreciation recapture)... Salary expense (5) Rent expense.... Interest expense ........... Tax expense (property and payroll) ........... Repair expense ......... . Depreciation expense Health insurance expense (6)....... ..... Property insurance expense...... Office supplies expense...... Utility expense......... ... ... ... Charitable contributions. . . . . Totals ...... 110,000 12,000 16,600 13,800 5,800 29,200 1,600 1,500 3,000 2,200 500 $176,000 $176,000 $464,600 $464,600 1. The investment account consists of marketable securities of U.S. corpora- tions and U.S. Treasury Bonds. All of the dividends are considered quali- fied dividends. 2. Equipment was sold May 12, 2018, for $9,800. It was purchased new on May 1 of the prior year for $10,000, and its basis when sold was $6,300. 3. New equipment was purchased March 1, 2018, with $5,000 cash and a 543 three-year note payable. The first note payment is March 1, 2019. (Note correct amount of tax depreciation is included in depreciation expense acum in the trial balance.) 4. Notes payable are long-term except for $20.000 of the note to be paid next your 5. Salary expense is composed of salary of $30,000 each to Phil and to $50,000 to unrelated employees. 6. Health insurance premiums paid were for the unrelated employees. Phil and to Kate and 1 for Phil. Balance Sheet 12/31/2017 Trial Balance 12/31/2018 Debit Credit Debit Credit Cash. $ 12,000 14,000 150,000 $ 22.000 14.000 190.000 $ 38,000 94,000 10,000 34,000 5 63500 117.200 10.000 34.000 25,440 16,960 235,000 1,000 400 3,500 Investments (1).... Equipment (2,3) Accumulated depreciation.... Notes payable (3.4) .......... Capital stock .............. .. Accumulated adjustments account. .... Cash distributed to Phil Cash distributed to Kate .... Revenues... Dividend income (1) ........ Interest income (1) .......... Section 1245 gain (depreciation recapture)... Salary expense (5) Rent expense.... Interest expense ........... Tax expense (property and payroll) ........... Repair expense ......... . Depreciation expense Health insurance expense (6)....... ..... Property insurance expense...... Office supplies expense...... Utility expense......... ... ... ... Charitable contributions. . . . . Totals ...... 110,000 12,000 16,600 13,800 5,800 29,200 1,600 1,500 3,000 2,200 500 $176,000 $176,000 $464,600 $464,600 1. The investment account consists of marketable securities of U.S. corpora- tions and U.S. Treasury Bonds. All of the dividends are considered quali- fied dividends. 2. Equipment was sold May 12, 2018, for $9,800. It was purchased new on May 1 of the prior year for $10,000, and its basis when sold was $6,300. 3. New equipment was purchased March 1, 2018, with $5,000 cash and a 543 three-year note payable. The first note payment is March 1, 2019. (Note correct amount of tax depreciation is included in depreciation expense acum in the trial balance.) 4. Notes payable are long-term except for $20.000 of the note to be paid next your 5. Salary expense is composed of salary of $30,000 each to Phil and to $50,000 to unrelated employees. 6. Health insurance premiums paid were for the unrelated employees. Phil and to Kate and 1 for Phil